Ietto-Gillies, G., & Meschi, M. (1999). the Characteristics, Performance and Strategic Behaviour of Merged Versus Non-merged Establishments in Britain. Review of Industrial Organization,

7/21/2019 Ietto-Gillies, G., & Meschi, M. (1999). the Characteristics, Performance and Strategic Behaviour of Merged Versus

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Review of Industrial Organization 15: 124, 1999.

1999Kluwer Academic Publishers. Printed in the Netherlands. 1

The Characteristics, Performance and StrategicBehaviour of Merged Versus Non-Merged

Establishments in Britain

GRAZIA IETTO-GILLIES and MELORIA MESCHI

Professor of Economics, Research Fellow, South Bank University Business School, 103 Borough

Road, London SE1 OAA

Abstract. The paper compares the structural characteristics, market conditions, organizational

features, strategic behaviour and performance of merged versusnon-merged private business estab-lishments in Britain. The results are based on the analysis of the 1990 Workplace Industrial Relations

Survey. The following conclusions are reached: merged establishments tend to be rather old, of small

to medium size, more likely to be foreign-owned and to be involved in manufacturing. Compared to

non-merged establishments they are likely to operate in international and oligopolistic markets, in

multi-products and in conglomerate businesses. The merged manufacturing establishments are more

likely to have been involved in restructuring strategies and to have cut jobs and achieved productivity

gains. More merged establishments declare a below-average financial performance.

Key words:Mergers, business performance, strategies, Britain

JEL Classification:G34, L1, L2

I. Introduction

The last few decades have seen a series of merger waves which have prompted

explanations by economists as to why mergers occur. Among the theoretical expla-

nations for merger activity we find the following. The achievement of economies

of scale or scope, the discipline of inefficient management (Jensen and Meckling,

1976), the diversion of free cash flow from shareholders (Jensen, 1986), the pursuit

of growth in order to increase the managers power (Marris, 1964), the response to

other mergers taking place in the market (Cantwell, 1992), the increase in market

power, or, in the case of transnational mergers, the gain of a presence in a foreign

market. We are very grateful to two anonymous referees of this journal for very useful comments to

an earlier draft. The paper has also benefited from comments at presentation at the University of

Manchester Institute for Technology (UMIST, Feb. 1998) and at a conference on Integration and

Globalization, South Bank University (Jan. 1998). This research was done in the context of a wider

project on Technology, Economic Integration and Social Cohesion funded by the EC-TSER.


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2 GRAZIA IETTO-GILLIES AND MELORIA MESCHI

The wealth of explanations on the causes of mergers has been accompanied by

considerable empirical work that, for the UK, unequivocally shows the following:

(a) in the short to medium term (3 to 5 years) the performance of merged compa-

nies in terms of profitability is disappointing, (b) among shareholders, only those

holding shares of the target company gain from a merger, and (c) mergers have a

small but positive effect on market concentration.1

Our paper follows in this tradition of applied work; it addresses issues of

characteristics, market conditions, strategic behaviour and performance of merged

establishments as compared to non-merged ones that belong to larger multi-

establishment organizations and to independent (single) establishments in Britain.

The issues addressed allow us to draw a detailed profile of merged establishments.

This gives the study a distinctive character.

The data refers to 1990, and the merged sample is made up of establishments

that have changed hands through merger during the three preceding years. The

years covered in this study fall within a period (19861989) which has seen the

largest merger wave in post-war Britain (CSO/NSO, various years).We use primary data from the 1990 UK Workplace Industrial Relations Survey

(WIRS).2 The WIRS is an establishment-level survey containing a wealth of infor-

mation on structural characteristics, and on many other economic aspects such as

performance, market structure, companies strategies and industrial relations. Al-

though it has been widely used by labour and industrial relations economists, there

has been no attempt, to our knowledge, to use the data in relation to the merger

activity in which the establishments may have been involved. There is, in fact, a

specific question in the survey asking whether the establishment has or has not been

involved in mergers within the last three years. The data used in this paper relate to

variables constructed from the answers to questions set to various managers in the

establishments. Some of the questions are on factual information; others are basedon the respondents judgement and discretion, such as the information on financial

performance.

Our results show that, compared to non-merged establishments, the merged

ones have the following profile.3 They are more likely to be foreign-owned

(more specifically US-owned) to be in manufacturing and use less labour-intensive

processes to operate in international and in oligopolistic markets to operate multi-

products and conglomerate businesses, and have a more decentralized decision-

1 See Jensen and Ruback (1983), Hughes (1993), and Meschi (1997) for surveys of the empirical

works on mergers and acquisitions.2 The WIRS has been conducted with financial support from the Employment Department, the

Economic and Social Research Council (ESRC), the Policy Studies Institute, the Leverhulme Trust,

and the Advisory, Conciliation, and Arbitration Service of the UK. There have, so far, been three

surveys: in 1980, 1984, and 1990. A 1998 survey is under way.3 It should be pointed out that given the nature of the data the results presented in this paper

do not give comparisons between the same establishments before and after merging, but between

different establishments some of which have merged and some of which have not, in relation to the

same time period.


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MERGED VERSUS NON-MERGED ESTABLISHMENTS IN BRITAIN 3

making organizational structure. Comparatively more merged establishments have

reduced employment, operate considerably below full capacity and declare a worse

than average financial performance. Compared to independent establishments the

merged ones are younger and bigger; they have undergone significant changes in

work organization and practices; a larger number of them has reduced employment

and declares worse than average financial performance.

The paper is developed by discussing in Section II the data and the method-

ology used. This is followed by an analysis of merged versus non-merged and

independent establishments according to structural characteristics (Section III),

market conditions (Section IV), organization of production, product strategy and

decision making processes (Section V), restructuring and strategies towards labour

(Section VI), and performance (Section VII). The last section summarises and

concludes.

II. Data and Methodology

The data comes from the third wave of the Workplace Industrial Relations Sur-

vey (WIRS), which took place between January and September 1990. The survey

sample was drawn from the latest available Census of Employment (1987), and

was limited to those workplaces employing 25 or more workers.4 As customary

in surveys of this kind, larger establishments were oversampled and those that fell

below the 25 employees threshold between 1987 and 1990 were discarded. Weights

to correct for these under sampling biases were supplied with the data, and we have

used them throughout our empirical work.

The data is generated from questionnaire-based interviews carried out at 2061

public and private establishments engaged in either manufacturing or the provision

of services in Britain.5

Managers were interviewed in relation to a wide variety ofissues, and two of the questions allowed us to allocate establishments into three

different categories for analysis. The first question asks whether the establishment

is single or part of a larger organization. The second question asks whether the

establishments owner was the same three years ago, and if not how the change

in ownership has come about.6 On the basis of the answers to these questions we

4 The 25 employees threshold was chosen due to resource constraints (Millward, Stevens, Smart,

and Hawes, 1992). This threshold is common in many official surveys, although most establishments

are below this size and although establishments that are smaller than this threshold tend to have a

better financial performance if they survive.5 The industrial coverage includes all the sectors defined in Divisions 1 to 9 of the 1980 Standard

Industrial Classification, with the sole exception of deep coal-mining.6 Note that the question on the ownership change was only asked if the respondent manager was

not a Personnel/HR specialist manager; this resulted in the loss of 507 observations. The following al-

ternatives are available as to the mode of ownership change: (a) friendly merger; (b) hostile takeover;

(c) hive-off; (d) privatization; (e) senior management buy-out; (f) employees buy-out; (g) other. If

an establishment falls in category (a) or (b) we code it as merged. There is only one establishments

in (b); establishments in the other categories are dropped from the sample.


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have created three samples: the merged sample: establishments that are part of a

larger organization and have been acquired via merger during the last three years;

the non-merged sample: establishments that are part of a larger organization and

have not changed hands during the last three years; and the independent sample:

single, independent establishments. After data cleaning and selection (see Appen-

dix A1), 673 observations remained, corresponding to a weighted sample of 914

workplaces. There are 83 (96 weighted) merged, 408 (467 weighted) non-merged

and 182 (351 weighted) independent establishments.

Of all the variables available on the merged/non-merged sub-set, we concen-

trated on those which are most relevant from the point of view of the economics

of merger activity. They are presented into 24 groups of variables (described

in Appendix A2). Tables IVI list the percentages of merged, non-merged and

independent establishments for each variable and category of interest grouped

according to structural features (Table I), market conditions (Table II), strategic

behaviour (Tables III, IV and V), and performance (Table VI). The vast majority

of the variables used in this analysis refer to the establishment; few refer to theorganization to which the establishment belongs. All the variables are factual, apart

from some of the performance variables, which reflect the managers perception.

Most of the questions in the WIRS allow for categorical answers, and therefore

we analysed the data using frequency counts and contingency tables.7 For each

row in Tables IVI we report results of the KruksalWallis test of the null hypo-

thesis that the mean scores are the same between the merged and non-merged, and

between the merged and independent samples. Rejection of the null hypothesis

implies that the proportions of establishments are different across the samples.

The analysis summarised in Tables IVI is bivariate as for many variables we

do not have enough observations in the merged sample to carry out a multivariate

analysis. However, whenever the number of observations allowed us, we did lookat the interactions of more than one variable with the merged status of the estab-

lishment. The results of these cross-tabulation will be given in the text whenever

available.

III. Structural Characteristics

The structural characteristics variables constructed from the survey relate to size

of the establishment, nationality of ownership, the location of the establishment

7 Before proceeding with the creation of individual dummy variables we tested for independence

between the merged/non-merged (or merged/independent) status and each of the variables 124 using

Pearsons Likelihood ratio test. For example, looking at Table I, we reconstructed the size variable as

taking values from 1 (less than 50) to 6 (more than 1,000) and tested for independence between size

and the merged/non-merged and the merged/independent status. We repeated this procedure for each

variable. For reasons of space test results are omitted from the paper; they are available on request

from the authors.


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within Britain, its age, sector (manufacturing versus services8) and percentage of

turnover covered by labour costs, which can be taken as a proxy for the labour

intensity of production.

Table I gives the averages and the 2 for the relevant structural feature variables.

As regards size (group 1), the distributions of merged and non-merged establish-

ments are statistically the same, while there are significant differences between

merged and independent establishments. Independent establishments, 71.9 per cent

of which employ less than 50 employees, are smaller, while merged establishments

are more concentrated in the small to medium size bands, with 53.6% of them

employing between 50 to 499.

The vast majority of merged establishments (93.4%) is of small to medium

size (between 25 and 199 employees): the probability of being in the merged

sample is very high for small to medium establishments, and very low for large

establishments.9

As regards the nationality of ownership (variables 2, 3, 4), a larger proportion

of merged establishments is owned by foreign companies: 17% versusonly 9.5%of non-merged. The proportion of establishments owned by a US corporation is

higher in the merged sample. In the run-up to the introduction of the Single Mar-

ket, Japanese and US companies have increased their foreign direct investment

(FDI) into the UK partly to secure access to European markets. Japanese FDI

has taken more the form of greenfield investment compared to US FDI (Thom-

sen and Woolcock, 1993), while American companies have favoured mergers and

acquisitions.

Turning to the regional distribution (variables 5), the results are statistically

the same for merged, non-merged and independent establishments, with the fol-

lowing three exceptions. First, a larger proportion of merged than non-merged or

independent establishments are located in the East Midlands (9.5% versus 4.6 and3% respectively). Second, there are no merged establishments in Wales. Third, the

proportion of merged establishments in Scotland (4.4%) is lower than that of the

other two types of establishments.

In order to explain the puzzling results for Wales, we analysed the overall sam-

ple of private establishments that are not headquarters. Of the total relevant sample

(1350 establishments) only 58 (4.3%) are in Wales; of these, 40% are indepen-

dent, 68% have less than fifty employees, and 68% are in the service sector. The

structural characteristics of Welsh establishments, combined with the low sample

proportion conjure to lower the probability of observing a merged establishment.

8 We also looked at the distribution of the data across two-digit industries; however, in most

industries the number of observations in the merged sample was too small to allow any meaningful

analysis. For those industries for which enough observations were available, the data distribution

shows a higher concentration of merged than both non-merged and independent establishments:

Electrical and Electronic Engineering (10% of merged establishments are in EEE, versus 2.1%

of non-merged and 1.5% of independent), and Paper, Printing and Publishing (17% of merged

establishments,versus1.7% of non-merged and 6% of independent).9 This is confirmed in other studies. See Hughes (1993) and Meschi (1997) for a survey of results.


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Table I. Structural features of establishments.

Variables Merged Non-Merged Independent

%a %a 21b %a 21

b

[1] Size (Total employment)

Less than 50 45.4 53.4 2.0 71.9 23.6

5099 32.5 27.1 1.1 20.1 6.6

100199 15.5 11.2 1.4 6.7 7.4

200499 5.6 7.3 0.3 0.9 8.5

500999 0.7 0.6 0.03 0.3 0.4

Over 1,000 0.3 0.4 0.01 0.1 0.1

[2] UK owned 83.0 90.5 4.7 n.a. n.a.

[3] US owned 6.8 2.9 3.6 n.a. n.a.

[4] EEC owned 7.0 4.4 1.2 n.a. n.a.

[5] Region

North 10.1 7.1 1.1 4.9 3.6

North West 7.8 12.2 1.5 13.8 2.5

Yorkshire/Humberside 10.2 11.2 0.1 9.9 0.0West Midlands 7.3 6.1 0.2 5.6 0.4

East Midlands 9.5 4.6 3.7 3.0 7.3

East Anglia 4.9 2.5 1.7 3.2 0.6

South West 7.3 8.1 0.1 7.7 0.02

South East 24.8 20.4 0.9 17.8 2.3

London 13.8 12.3 0.2 16.3 0.4

Wales 0.0 4.5 4.5 5.6 5.6

Scotland 4.4 11.0 3.9 11.9 4.7

[6] Establishment age in years

Less than 1 4.3 3.7 0.1 0.7 7.1

15 18.7 14.3 1.2 16.1 0.3

610 8.7 17.5 4.5 22.8 9.4

1115 14.8 10.4 1.5 12.5 0.31620 12.1 6.0 4.5 6.9 2.8

More than 20 41.4 48.1 1.4 41.0 0.0

[7] Manufacturing 40.3 20.2 17.8 38.0 0.2

[8] Labour costs as % of turnover

Less than 25% 43.2 46.9 0.4 n.a. n.a.

2549% 51.6 38.1 5.5 n.a. n.a.

5074% 5.0 12.0 3.7 n.a. n.a.

More than 75% 0.2 3.0 2.4 n.a. n.a.

a Weighted percentage of merged, unmerged and single establishments falling

in the category defined in the Variables column.b KruskalWallis non-parametric test of the alternative hypothesis that the

mean scores between the two samples differ. Under the null hypothesis the

test is distributed as a 2 with one degree of freedom. Column (4) lists testresults for the hypothesis that the mean scores for merged and unmerged estab-

lishments differ. Column (6) lists test results for the hypothesis that the mean

scores for merged and single establishments differ.

n.a. = not available. Indicates 10% significance. Indicates 5% significance.


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Moreover, after data clearing, the absolute number of Welsh establishments is fur-

ther reduced to 41, increasing the probability of merged establishments being left

out of the sample.

In our sample, a quarter of all mergers have taken place in the South East.

From a further, multivariate analysis of the data, it emerges that in this region a

staggering 54.3% of merged establishments had laid off workers in the past year,

as compared to 22.6% of non-merged and 21.2% of independent establishments.

This pattern was observed in all the other high-merger regions with the exception

of Greater London10 the North, Yorkshire, and the East Midlands.11 High-merger

regions are also the regions where the share of unemployment created by merged

establishments is higher, justifying the preoccupation of the Monopoly and Merger

Commission with the possible negative effect of mergers on regional economies.

In terms ofage(variables 6), although there are some significant differences

when age is split into six categories, the proportions of establishments aged more

than ten years are not statistically different across the three groups (68.3% for

merged, 64.5% for non-merged, and 60.4% for independent establishments). Thesame can be said if we use the 20-years old cutting point.

Variable 7 shows that while 40 percent of merged establishments operate in

themanufacturingsector, only 20% of non-merged ones do so. The probability of

observing a merged establishment in the manufacturing sector is 15%,versus8.8%

almost half in the services.12 This result shows that merger activity was higher

in the manufacturing sector, where the drive for modernization and restructuring

was highest (Bean and Crafts, 1996). As we discuss in Sections V and VI, mergers

played an important role in the restructuring process.

Finally, some information on the production methods of the establishments

can be inferred from the variables in group 8 which give results on questions

related to the labour intensity of the production process.

13

There are significantdifferences in the averages of merged versus non-merged establishments for the

two middle bands of labour costs as a percentage of turnover. There is, on av-

erage, a higher percentage of merged against non-merged in the lower middle

band (2549%), while the upper-middle band (5074%) shows the opposite. These

results seem consistent with the sectoral ones and indeed reinforce each other:

multivariate cross-tabulations shows that of the establishments with higher labour

10 In Greater London, 26.4% of merged establishments cut jobs versus36 percent of non-merged

and 17.6% of independent.11 The regional proportions of merged, non-merged and independent establishments that cut em-

ployment are as follows. North: 61.4%, 12.2% and 38%); Yorkshire: 65.3%, 44% and 35.7%; East

Midlands: 43.2%, 26.1% and 27.4%.12 This pattern is not dissimilar to the one for merger activity in the world as a whole over the same

period. Data in the UNCTAD-DTCI (1996: Annex, table 9, p. 283) show that the secondary sector

outstripped the tertiary one on merger activity in the years 19881990 by a factor of 1.05. However,

the years 19931995 have seen a reversal with the secondary sectors merger activity at 88 percent

of the one in the tertiary sector.13 Information on this variable is not available for independent establishments.


8/25


intensity, 84.7% are from services. Establishments in services and with high labour

intensity exhibit a lower probability of merger than establishments which are in

manufacturing and with lower labour intensity of production.14

To summarise, the characteristics profile of the merged establishments in the

three years preceding 1990 is the following. Merged establishments tend to be

of small to medium size (between 25 and 199 employees). In a larger proportion

of merged versus non-merged workplaces the parent company is from the US.

Almost half of all acquired establishments are located in either the South East

or Greater London. In the most targeted areas outside London and the South East

(the North, Yorkshire, and the East Midlands) mergers have been accompanied by

job cuts. Considerably more merged than non-merged establishments operate in

manufacturing, where the probability of being taken over is almost double than in

the services. Moreover, those establishments with more labour-intensive processes

appear to have lower probability of merger.

IV. Market Conditions

The anti-competitive effects of mergers are of great concern to antitrust authorities

worldwide and competition issues are also at the forefront in the decision-making

process of the UK Monopoly and Merger Commission (Fairburn, 1993). There are,

however, great difficulties in measuring the effects of mergers on competition; such

difficulties start with the definition of the product market in which such effects have

to be measured.

The WIRS data have the advantage of supplying the number of competitors

existing in the market for the organizations product, given by the managers

themselves. Moreover, information is supplied on the geographical scope of the

establishments market, i.e. whether it is international, national or local. This in-formation is particularly useful since it is at the product level; we therefore do

not have to use industry proxies to appraise market competition.15 Nonetheless,

we must take account of the fact that the variable derives from questions on the

organizations product market and market power: given the sensitivity of the latter

issues, the answers are likely to contain a degree of subjectiveness.

Table II presents results of variables related to market conditions. It shows

that the distribution of merged and independent establishments in terms ofmarket

location and competition is statistically the same. There are however differences

14 The probability of merger for high labour intensity establishments is 6.6%, a third of that of low

labour-intensity ones (18.5%).15 For a discussion of the benefits of using the WIRS number of competitors variable as a

proxy for market power with respect to industry concentration ratios or market shares see Stewart

(1990). An alternative way of measuring competitiveness would be to use the elasticity of demand

for the establishments product. This information is available in WIRS, as managers are asked what

would happen to the demand for their product if its price was increased by 5%, ceteris paribus.

However, when we included the elasticity variable as a dummy it failed the independence tests, and

was therefore dropped from the analysis.


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Table II. Market conditions.


%a %a 21

b %a 21

b

[9] Location of main market

International 13.8 7.8 3.6 16.5 0.4

National 30.8 23.5 2.3 33.7 0.3

Regional or local 40.9 58.6 10.1 49.8 2.4

[10] Market competition

Competitive market (5 or more competitors) 61.7 65.6 0.5 66.4 0.7

Oligopoly (less than 5 competitors) 36.9 24.8 5.9 29.9 1.7

Monopoly (no competitors) 1.5 9.6 7.0 3.7 1.3

a,b See Table I. Indicates 10% significance. Indicates 5% significance.

between merged and non-merged establishments, with proportionally more merged

establishments operating in international (13.8% versus 7.8%) and oligopolistic

markets than non-merged ones (36.9%versus24.8%). These two sets of results are

consistent with each other; oligopolistic markets tend to be international.

It is interesting to note that almost 62 per cent of merged establishments be-

long to organizations operating in competitive markets, and this proportion is not

statistically different from those registered for both non-merged and independent

establishments. There does not seem to be an imbalance in market conditions.

Further analysis also showed that among merged establishments, the proportion

operating in competitive markets is the same in manufacturing (62%) and services

(61.3%).

V. Organization of Production, Product Strategy and Decision-Making

Processes

The 1970s and 1980s have produced a vast amount of literature well repre-

sented in Pitelis (1993) on internalization and organizational integration. Most

of these writings find their theoretical underpinning in the transaction costs the-

ory which goes back to the seminal paper by Coase (1937) and the follow-up by

Williamson (1975 and 1981). The 1980 saw opposite moves by companies towards

out-sourcing and externalization of activities. More recent evidence shows a drivetowards more internalization by private business operating in the manufacturing

sector (OFarrell, 1995).

Our data (Table III) show a higher percentage of non-merged establishments

declaring a more internalized structure via upstream integration, while the per-

centages for downstream integration are the same between the two groups. On


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Table III. Organization of production.

Variables Merged Non-Merged

%a %a 21

b

[11] Upstream integration

All the main suppliers are part of the organization 12.3 11.2 0.1

Some of the main suppliers are part of the organization 25.2 40.5 7.9

[12] Downstream integration 14.4 10.1 1.5

[13] Management structure

Senior manager 1 39.5 30.5 2.9

Senior manager 2 30.0 22.8 2.2

Financial surplus 1 24.1 24.9 0.0

Financial surplus 2 32.5 21.0 5.9

Trade union recognition 1 37.8 21.9 10.8

Trade union recognition 2 21.9 17.9 0.8


the whole, it appears that establishments involved in mergers are also likely to

be among those following the externalization strategies prevalent in the 1980s.

Whether this will continue in the 1990s is an interesting question which is worthfollowing up at the next survey.

An issue connected to internalization/externalization is the one related to the

effects on the local economy. If companies externalize they can get their supplies

from local firms or from others, including international suppliers. For example,

Phelps (1997) uses the linkages with local suppliers as a measure of the compa-

nys embeddedness in the local economy. However, we do not know whether the

establishments in the survey use local, national or international suppliers.

There is another issue of interest to regional development. Merged establish-

ments show a higher degree of decentralisation in the decision-making process

about the appointment of asenior manager, the use offinancial surplusand union

recognition (variables 13). However, when we analyse the data further and lookat the regional breakdown, it emerges that in the most peripheral regions (North,

North-West, and Scotland) the percentage of merged establishments where the

decision/recommendation on the appointment of senior managers or the use of

financial surplus are made in loco is much lower than in other regions, and in

Yorkshire only 19 per cent of the managers in merged establishments have a say in


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Table IV. Product strategy.


%a %a 21

b %a 21

b

[14] Diversification at establishment level

Single product 48.8 41.8 1.6 53.5 0.7

Main product 26.4 39.0 5.3 37.8 4.3

Many products 24.8 19.2 1.5 8.7 18.3

[15] Diversification at organization level

Single business 18.0 36.9 12.8 n.a. n.a.

Dominant business 24.4 18.7 1.6 n.a. n.a.

Related business 23.8 30.5 1.7 n.a. n.a.

Conglomerate business 33.8 13.9 21.9 n.a. n.a.


how the financial surplus is spent.16 This pattern may have negative connotations

from the perspective of local development and skill-nurturing.

The results on the decision-making processes are compatible with those on

product strategies. Variable 14, Table IV shows that a larger proportion of recently

acquired establishments are multi-product outlets than both non-merged and in-

dependent ones. More importantly, merged establishments are much more likely

to be part of conglomerates (variable 15). Also, the percentage of establishments

belonging to purely horizontal businesses is much lower among merged (18%)

than non-merged ones (36.9%). This result may be linked to that on the division-

alization of the managerial decision-making process within the organization. Asconglomerate businesses are made up of totally unrelated parts, it is much more

likely that decision-making within such businesses be decentralized, as the com-

petences of managers are widely varied. A more decentralised decision-making

process in mergedversusnon-merged establishments is therefore consistent with a

larger proportion of merged establishment being part of conglomerates.

VI. Restructuring and Strategies Towards Labour

One of the motivations frequently adduced for merger is the quest for efficiency

gains. Efficiency can be achieved by adopting measures aimed at increasing pro-

ductivity. We have information from WIRS on whether productivity-enhancing16 The percentages of merged establishments where the decision/recommendation to [1] appoint a

senior manager, [2] employ the financial surplus, and [3] (de)recognize a trade union are as follows.

North: 51.2; 16.5; 85.8. North-West: 42; 0; 42. Yorks.: 75.5; 19; 61.4. West Midlands: 91; 98.5; 100;

East Midlands: 79; 63.6; 63.6. East Anglia: 100; 100; 28.2. South West: 82; 81.8; 80.6. South East:

51; 62; 23.7. Greater London: 100; 81.5; 95.2. Wales: n.


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Table V. Strategies towards labour at the establishment.


%a %a 21

b %a 21

b

[16] Changes towards work flexibility

Manual workers 33.4 33.4 0.01 15.9 14.1

Non-manual workers 23.0 26.4 0.5 11.9 7.5

[17] Changes affecting jobs

Changes in capital endowments 64.4 52.7 3.9 37.2 19.1

Changes in work organization/practices 39.5 32.8 1.4 13.4 27.3

[18] Changes for more workers involvement 44.6 47.1 0.2 27.1 10.8

[19] Unions recognised for pay bargaining 33.7 44.5 3.8 19.3 9.1


measures have been adopted at the establishment during the last three years. We

do not have evidence on whether these measures were taken before or after the

merger; however, given the three-years time span of the question, it is likely that

they refer to post-merger. Care has however to be exercised in interpreting the

results.

The variables in Table V refer to the adoption of specific strategies towards

labour; they are all part of restructuring processes and most are efficiency-seeking.

Considering merged and non-merged establishments first, we see that the pro-

portion of establishments that have introduced changes towards work flexibility

(variable 16),changes in work organization affecting jobs(variable 17), orchangesfor more workers involvement (variable 18) are statistically the same. Changes

in human resources policy have been undertaken in establishments belonging to

large organizations irrespective of their merged status. It has to be noted that such

changes have only involved less than half the establishments. Although there are

no significant differences between merged and non-merged establishments, multi-

variate cross-tabulations show that the proportion of establishments that introduced

changes in work flexibility for manual workers is higher in manufacturing (42.8%

of merged and 45% of non-merged) than in the services (27% and 29% for merged

and non-merged). The same is true for the introduction of changes in working

practices and work organization.

Where merged establishments differ substantially from non-merged ones is inthe adoption of changes incapital endowmentsandunion recognition(variables 17

and 19). Effects on jobs via capital investment are declared in a larger proportion

of merged (64.4%) than non-merged (52.7%) establishments, and the differences

are significant. This result can be taken as an indication that mergers are either

followed by capital investment or take place at establishments where efforts are


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being made to update the capital stock and that this results in job losses. Further

analysis of the data shows that this is especially true in the manufacturing sector,

where in 88% of merged establishment (and 70% of non-merged) new investment

was cited by the manager as having caused job cuts,versus48% in the services. As

regards unionization, unions are recognised more in non-merged than in merged

establishments (44.5% and 33.7% respectively).

Looking at independent establishments, there are substantial and significant

differences between these and both merged and non-merged establishments in

all the variables considered in this section. It appears that a larger proportion of

multi-establishment organizations have been introducing changes than independent

establishments. This is despite the fact that in larger organizations there are signif-

icantly more establishments where it is declared that the management is limited

in its actions by the system of industrial relations in place or by the lack of skills

among the workforce.17

VII. Performance

As we have seen in Section VI, the adoption of restructuring and efficiency-

enhancing strategies appears to be specific to large organizations. This is confirmed

by the outcome in terms oflabour productivity (variable 20 in Table VI). The pro-

portions of establishments recording higher, lower, or the same level of productivity

as compared to three years ago are statistically not different between merged and

non-merged establishments,18 while productivity growth has been much higher in

merged and non-merged establishments than in independent ones.

Variable 21 shows that considerably more merged establishments reduced

employment in the past twelve months as compared to both non-merged and

independent ones. This suggests that the high productivity growth in merged work-places was achieved to a larger extent via job cuts.19 From further, multivariate

analysis it transpires that the worst hit were merged establishments in manufac-

turing, 61.2% of which experienced job cuts versus only 38% of non-merged

ones. Correspondingly, 48% of merged establishments in manufacturing experi-

enced very high productivity growth versus 29% of non-merged and independent

ones. For the service sector, the proportions are lower (33.3, 36.1 and 22.3%

respectively).

17 The interviewed managers declared that management is constrained by the system of indus-

trial relations in 8.1% of the merged establishments; 14.9% of the non-merged and only 2.5% of the

independent ones. The corresponding percentages for constraints by managers due to lack of skills

are respectively 14%, 15% and 5.4%.18 Apart from productivity growth, we also have information on how the level of labour pro-

ductivity at the establishment compares with similar workplaces. However, this variable failed the

independence tests and was dropped from the analysis.19 From information on earning dispersion available from WIRS, we can infer that the job cuts in

merged establishments are likely to be among the low paid, unskilled workforce. The percentage of

workers earning half or less the average is in fact lower in merged than in non-merged establishments.


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Table VI. Establishments performance.


%a %a 21

b %a 21

b

[20] Changes in productivity over 3 years

Lot higher 39.1 34.6 0.7 24.9 7.6

Little higher 44.0 43.6 0.0 29.5 7.2

About the same 14.2 20.4 1.9 39.7 21.6

Little lower 2.7 1.2 1.0 5.9 1.7

Lot lower 0.0 0.2 0.2 0.0 0.0

[21] Employment reduced during past year 44.1 31.3 5.8 25.4 12.7

Due to lack in demand 16.1 11.8 1.3 14.2 0.2

Due to automation/new equipment 3.6 5.2 0.4 4.0 0.0

Due to new working methods/integration 26.0 10.5 16.8 5.3 36.6

Due to efficiency/competitiveness/cost red. 11.3 11.8 0.0 5.0 4.9

Due to cash limits/budget reduction 2.4 3.9 0.5 2.3 0.0

[22] Capacity utilization

Operates at full capacity 48.6 53.9 0.9 n.a. n.a.

Operates somewhat below full capacity 40.5 40.1 0.0 n.a. n.a.

Operates considerably below full capacity 10.9 6.0 2.9 n.a. n.a.

[23] Change in product demand over the year

Demand has been rising 55.9 64.6 2.6 n.a. n.a.

Demand has been falling 22.2 8.0 17.4 n.a. n.a.

[24] Financial Performance compared to similar establishments

Lot better than average 19.5 29.5 3.7 15.3 0.9

Little better than average 30.5 27.4 0.4 23.8 1.7

About the same 31.4 31.2 0.0 34.7 0.3Little worse than average 9.8 3.9 5.6 3.9 5.0

Lot worse than average 0.1 1.0 0.7 1.0 0.7


A significantly larger proportion of merged than non-merged establishments

(10.9% versus 6%) is operating considerably below full capacity (variable 22).20

This is consistent with the fact that more merged companies appear to operate in

oligopolistic structures where a considerable degree of excess capacity is usually

found (Cowling, 1982). Also, the proportion of merged establishments operating indeclining sectors, i.e. facing a fall in demand (22%) is almost three times as large as

that of non-merged establishments (8%). The latter results are somewhat echoed in

20 Further cross-tabulations show that 58.1% of merged manufacturing establishments were

operating below full capacity, versus46% in the services.


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the answers to questions on financial performance(variable 24). The percentages

of managers in non-merged establishments who report performances a lot better

and a little worse than in similar establishments are 29.5% and 4% respectively; in

contrast, the figures for merged establishments are 19.5% and 10% respectively.

Overall, fewer managers in merged than non-merged establishments report a

better than average financial performance (50% versus 57%). This could be the

result of within-the-organization difficulties and inefficiencies connected with the

merger. While merged establishments appear to be under-performing compared to

non-merged ones, they perform better than independent establishments, only 40%

of which have a declared above-average performance. This could be a sign that

under-performing establishments are more likely to be the object of a merger and

the management is not able to turn the situation around, not within the three years

considered in the survey. The results are consistent with those usually found in the

literature, where industry-adjusted estimates of accounting profitability show very

disappointing results. Of course our results need to be taken with a pinch of salt,

because they express the managers perception of what the financial performanceof similar establishments is, and managers may after all deceive themselves and/or

the interviewers.21

Further multivariate analysis shows that 39% of the managers of merged estab-

lishments in manufacturing, and 57.6% in the services report a better-than-average

performance. This implies that although the highest level of restructuring and the

highest productivity gains are recorded in manufacturing, merged establishments

operating in the services have a better perceived financial performance. This points

towards a conclusion that the overall financial performance of mergers at least in

the short run is driven largely by the growth and dynamism of the sector/industry.

The result is confirmed by the fact that the proportions of establishments recording

above-average financial performance are almost identical in the services (57% and58.4% for merged and non-merged establishments), while merged establishments

do worse than non-merged ones in manufacturing (with proportions of 39% and

50.7% respectively).

VIII. Summary and Conclusions

In this paper we compare the structural characteristics, market conditions, orga-

nization of production, strategic behaviour, and performance of merged versus

non-merged and independent establishments in the UK. The actual or perceived

poor performance of merged versusnon-merged establishments is consistent with

the findings in the literature. We summarize our main findings in boxes 1 and 2where the profile of merged establishments compared to non-merged and indepen-

21 Nonetheless, these perceptions may be a foretaste of things to come. Anderson and Norris

(1990) show that managerial satisfaction may be a precursor to long-term performance of their

business.


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dent ones must be taken as a stylized one, to be read in conjunction with the full

explanations in the body of this paper.

Merged establishments are more likely to be foreign (particularly US)-owned

than non-merged ones; about half of them are located in Greater London or the

South East; more merged establishments in peripheral regions have experienced job

cuts; and the probability of observing a merger in manufacturing is, at 15%, almost

double than in the services. As to market conditions, the probability of having an

international product market is higher for merged than non-merged establishments,

so is the probability of operating in oligopolistic markets.

It does not appear that vertical integration is higher among merged establish-

ments, rather the contrary. Moreover, merged establishments are more diversified

than non-merged ones. Proportionately more merged establishments are multi-

product, and are part of conglomerate businesses. Perhaps as a consequence, the

percentage of establishments where important decision-making takes place in loco

is higher in the merged than in the non-merged sample. There is however one

important qualification to be made here, and it is that in the peripheral regionsof Scotland, the North and North-West the incidence of local decision-making is

substantially lower.

As regards restructuring strategies the main difference is between establish-

ments belonging to larger organizations (whether merged or non-merged) and

independent establishments. Restructuring is mainly an organization-linked phe-

nomenon. From a further analysis of the data, however, it emerges that the most

pro-active sample is that of merged establishments operating in manufacturing.

Consistently with this, a good 48% of manufacturing establishments experience

very high productivity growth. Of course, the other side of the coin is that more

manufacturing than service outlets cut jobs, and more so if they had recently

been merged. Moreover, cross-tabulations show that the proportion of establish-ments operating at full capacity and facing rising product demand is lower in the

manufacturing sector than in the services. One possible overall conclusion from

these results is that in industries characterized by low demand and excess capacity,

merger activity aims at rationalisation and modernisation and reduction in capacity.

Finally, our data show that compared to similar workplaces more merged

than non-merged establishments have below-average financial performance up to

three years after merger. This is particularly true in the manufacturing sector.

Nonetheless, the fact that 39% of managers of merged establishments in man-

ufacturing and 57.6% in services declared above average financial performance

indicates a better level of performance in merged establishments than usually found

in the literature. However, one must interpret these results with care due to two

specific circumstances. First, the answers are in the nature of perceptions by themanagers themselves. Second, our overall results should not be interpreted as com-

parisons between pre- and post-merger characteristics of the same establishments

but as comparisons between characteristics of different establishments some of

which have undergone merger and some have not.


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Box 1. A stylised profile of merged establishments as compared to non-merged estab

Structural characteristics Market conditions Organization and product strategies Labour st

Foreign owned International market Less vertical integration Jobs aff

(particularly US owned) Oligopolistic market Decentralised decision capital e

East Midlands making Lower u

Less in Wales and Scotland Multi-product

Manufacturing sector Conglomerate business

Less labour-intensive process


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Box 2. A stylised profile of merged establishments as compared to independent estab

Structural characteristics Market conditions Organization and Labour strategie

product strategies

Larger size No significant difference Multi product Changes towa

More in the North and the flexibility

East Midlands Jobs affected

Less in Wales and Scotland capital endow

Younger Changes in w

More workers

Higher union


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Though more research may be needed on the linking together of issues of

performance, strategic behaviour, characteristics and market conditions of merged

establishments and companies, some policy conclusions can be drawn from the

above results. The poor performance results in terms of three main variables

overall job losses, capacity utilization and financial performance should be of

interest for future merger policy. Particularly so as there appear to be substantial

sectoral and regional differences. The overall results point to the need for a multi-

dimensional strategic industrial policy in which competition policy is linked to

regional development as well as to policies on industrial regeneration.

Appendix A1: Sample Selection Procedures

Initial sample size 2061

Minus:

Private establishments operating in the trading sector 551

Establishments whose respondent is not a specialist manager 507

Relevant sample 1003

Minus:

Establishments with no information of whether there has been a change in ownership 42

Establishments that changed ownership through other than merger/takeover 50

Unproductive establishments (headquarters and other administrative offices) 99

Establishments with no information available on market competition 20

Establishments with no information available on the location of the main market 4

Establishments with no info. available on product diversification at establishment level 26

Establishments with no info. available on product diversification at organization level 8

Establishments with no information available on downstream integration 10

Establishments with no information available on upstream integration 53

Establishments with no info. available on change in product demand over the year 4

Establishments with no info. available on change in productivity during the past 3 years 14

Resulting samples [unweighted(weighted)]: 673 (914)

Establishments that are part of a larger organization and have not changed ownership 408 (467)

Establishments that are part of a larger organization and have changed ownership 83 (96)

Single, independent establishments 182 (351)

The question about whether the establishments owner was the same three years ago was not

asked if the respondent was a specialist manager. As defined in WIRS, a specialist manager is a

Personnel, or HR, or Industrial Relations manager.


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Appendix A2: Description of Variables

STRUCTURAL FEATURES OF THE ESTABLISHMENTS

[1] Size.Total number of employees at the establishment. We divided the variableinto six dummies (Less than 50; 5099; 100199; 200499; 500999; over 1,000).

[24] Ownership. If the respondents declared that the establishment is part of a

larger organization they were asked: Is the controlling company (1) UK owned;

(2) 5050 UK-foreign owned; (3) foreign owned?; UK owned is equal to one

if the answer was (1) or (2). If the answer was (3) the following question was

asked: Where is the controlling head office of the ultimate controlling company?

(1) In USA/Canada; (2) in an EEC12 country; (3) in Europe other than EEC; or

(4) elsewhere?. Too few observations were in groups (3) and (4) for acquired

establishments to allow any meaningful comparisons. If the answer was (1) then

US owned is equal to one; if it was (2) then EEC owned is equal to one.

[5] Region.Dummies for the 11 geographical regions to which establishments are

allocated in WIRS.

[6] Establishment Age.Question: For how long has this establishment been op-

erating at this address?. Information on the exact number of years between 0 and

20; and more than 20 years. We divided the variable into six dummies (less than

1; 15; 610; 1115; 1620; more than 20).

[7] Manufacturing. Dummy equal to one if the respondent answered yes to the

question Is the main activity of this establishment manufacturing?. Information

is also available in WIRS on the 4-digit SIC80 sector in which the establishment isclassified for Census purposes. We cross-referenced the two variables to ensure no

misclassification had taken place.

[8] Labour Costs as a Percentage of Turnover. The respondents were asked:

About what proportion of this establishments sales revenue (turnover) is ac-

counted for by wages, salaries and other labour costs like pensions and national

insurance? Please choose a range among these: less than 25%; 2549%; 5074%;

more than 75%. We created one dummy for each of these ranges. The question

was not asked to managers of independent establishments.

MARKET CONDITIONS

[9] Location of the Main Market. We created three dummies based on the an-

swer to the following question: Is the market for your product or service (i.e.

the output of this establishment) primarily: (1) local; (2) regional; (3) national; or

(4) international?. This question was not asked if the respondent had answered


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yes to the previous question, namely Is the majority of the product or service of

this establishment sold to other parts of your organization?, in which case the

establishment has zero or small external market.

[10] Market Competition. We created three dummies based on the answer to

the following question: Is the market (for your product) (1) dominated by your

organization; are there (2) only a few competitors or (3) many competitors? Where

by few we intend 5 or less. Organizationvariable.

ORGANIZATION OF PRODUCTION WITHIN A LARGER ORGANIZATION

[11] Upstream Integration. The respondent was asked whether . . . this estab-

lishment obtains 10% or more by value of its supplies of raw materials, bought

in components, goods or services from any of its suppliers. If the answer was

positive, then the respondent was asked: Are any of these suppliers part of the

organization to which this establishment belongs? And if yes, all or some?. Wecreated two dummies according to whether all or only some of the main suppliers

are part of the organization.

[12] Downstream Integration.Equal to one if the question: Is the majority of the

product or service of this establishment sold to other parts of your organization?

was answered positively.

[13] Management Structure. Proxies for whether the establishment is a decen-

tralised source of decision making within the organization. The respondent was

asked: Which of these statements best describes how decisions about this work-

place are made in your organization? First, in relation to the appointment of a

new Senior Manager at this workplace. Second, in relation to (de)recognise a tradeunion or unions. Third, in relation to the use of any financial or budgetary surplus.

The variables Senior Manager1 (Financial Surplus1/Trade Union1) are equal to

one if the decision is taken at the establishment level; while the variables Senior

Manager2 (Financial Surplus2/Trade Union2) are equal to one if the recommen-

dation is made at the establishment level but the decision is taken higher in the

organization.

PRODUCT STRATEGY

[14] Diversification at the Establishment Level. Single Product is equal to one

if the question Is the output of this establishment concentrated on one product orservice or are there several different ones? is answered positively. If the answer

to that question was negative a further question was asked: Among the products

and services is there one main product or service accounting for at least a quarter

of sales revenue?. Main Product is equal to one if the answer to this question was

yes; many products is equal to one if the answer was no.


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[15] Diversification at the Organization Level.We created four dummies based

on the answer to the question: How would you characterise the controlling com-

pany and its subsidiaries in terms of the similarity of its business activities? (1)

a single business (90 percent or more of its sales in one line of business); (2) a

dominant business (70 to 90 percent of its sales in one line of business); (3) a related

business (no single business accounting for 70 percent or more of its sales, but all

businesses related to each other); or (4) a conglomerate (made up of unrelated

businesses).Organization variable.Perceptionvariable.

STRATEGIES TOWARDS LABOUR AT THE WORKPLACE

[16] Changes Towards Work Flexibility. Two variables equal to one if the an-

swers to the question: During the past three years has management introduced

any changes in working practices that have reduced job demarcation or increased

work flexibility for any section of the manual (non manual) workforce at this

establishments? were positive for manual or non manual workers.

[17] Changes Affecting Jobs. We created two dummies based on the answer to

the question: During the past three years have there been here any of the fol-

lowing types of change, directly affecting the jobs or the working practices of

any section of the workforce? (1) the introduction of new plant, machinery or

equipment (excluding routine replacement) (we called this Changes in Capital

Endowments); (2) substantial changes in work organization/practices not involv-

ing new plant, machinery or equipment? (we called this Changes in Work

Organization/Practices).

[18] Changes Towards More Workers Involvement. It is equal to one if the

question Has management here made any change in the last three years with the

aim of increasing employees involvement in the operation of the establishment

was answered yes.

[19] Unions Recognised for Pay Bargaining.It is equal to one if trade unions are

present at the establishment and the question: Are any of the unions recognised by

management for negotiating pay and conditions for any section of the workforce?

was answered positively.

PERFORMANCE

[20] Changes in Productivity.Five dummies based on the answer to the question:In your opinion how does the level of labour productivity here compare with what

it was three years ago? Is it (1) a lot higher; (2) a little higher; (3) about the same;

(4) a little lower; or (5) a lot lower?. Perceptionvariable.

[21] Employment Reduced. This is a dummy variable which is equal to one if


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the respondent answers yes to the question: Please consider the establishment

as a whole. Have there been any reductions in numbers in any section of the

workforce in the past 12 months?. If the answer is positive, a further question

is asked on the basis of which we created five further dummies: What have been

the main reasons for the workforce reductions in the last 12 months? (1) Lack

of demand for products or services; (2) Automation/mechanization/new equip-

ment; (3) Reorganised working methods/relocation/integration; (4) Improved

competitiveness/efficiency/cost reductions; (5) Cash limits/budget reductions.

[22] Capacity Utilization. Three dummies based on the answer to the question:

In relation to current premises and equipment would you say that this estab-

lishment is operating (1) at full capacity; (2) somewhat below full capacity; or

(3) considerably below full capacity. This question was not asked in independent

establishments. Perceptionvariable.

[23] Change in Product Demand. Two dummies based on the answer to thequestion: Over the past 12 months, would you say that the value of sales of the

main products or services of this establishment has been (1) rising; (2) falling; or

(3) stable. This question was not asked in independent establishments. Perception

variable.

[24] Financial Performance.Five dummies based on the answer to the questions:

How would you assess the financial performance of this establishment compared

with other establishments in the same industry? Would you say it was (1) a lot better

than average; (2) a little better than average; (3) about the same; (4) a little worse

than average; (5) a lot worse than average; or (6) no comparison is possible?.

Perception variable.

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Documents

Ietto-Gillies, G., & Meschi, M. (1999). the Characteristics, Performance and Strategic Behaviour of Merged Versus Non-merged Establishments in Britain. Review of Industrial Organization,